Oral evidence: Tax avoidance: the role of large accountancy firms - follow-up, HC 860
Oral evidence, 8 December 2014.
Witnesses
Kevin Nicholson, Head of Tax, PricewaterhouseCoopers LLP (UK firm), and Fearghas Carruthers, Head of Tax, Shire Pharmaceuticals, gave evidence.
Chair
Thank you, both of you, for coming this afternoon. I am going to start with you, Mr Nicholson, if I may. We have asked you to come back to see us because we reflected on the evidence you gave us on 31 January 2013 and tried to relate that to the revelations around the “Luxembourg Leaks” that have been in the press. I have a very simple question for you. Did you lie when you gave evidence to us on 31 January 2013?
Kevin Nicholson
No, I didn’t, Madam Chair. I stand by what I said in that meeting, but if there were any misunderstandings or things that I can clarify today, I would be more than happy to do that.
Chair
I find that rather hard, so can I refer you to some of the evidence you gave on 31 January? To question 36, you said: “We do not mass-market tax products, we do not produce tax products, we do not promote tax products.” You go on to say, “we are not just producing a clever idea and distributing it out.” You go on to say in question 39, “we are not in the business of selling schemes.” In answer to question 41, you say, “they are not mass-marketed schemes.” When I asked you at the end, “You do not create these terribly complex structures which are all about avoiding tax?” you said, “I’m sorry, Madam Chairman, I don’t agree.” If I then look at the evidence that has come into the public domain on around 343 companies and 548 letters, all of which are on PricewaterhouseCoopers headed notepaper, it is very hard for me to understand that this is anything other than a mass-marketed tax avoidance scheme.
Kevin Nicholson
First of all, they are not, and I am happy to clarify that and give the context—
Chair
They’re what?
Kevin Nicholson
They’re not mass-marketed tax schemes; they are not schemes, so let me—
Chair
I don’t understand that.
Kevin Nicholson
I’ll clarify that, because I realise how important that is. First of all, Luxembourg, like all countries, including the UK, is competing for business and for tax revenues. At the heart of the Luxembourg economy—now anyway—is an economy based around businesses going there to finance and hold investments, and the tax structure, the system that they have created facilitates that happening, along with all the other infrastructure.
Nick Smith
How many PwC staff are there in Luxembourg?
Kevin Nicholson
I think 2,500 people. Shall I continue? I don’t want to mislead the Committee. There are two things happening here: one is multinationals looking to finance operations overseas, and the second is really the holding of investments, mainly through funds or private equity. What we are doing is going to the Luxembourg authorities in advance, saying, “If I did these certain things, what would be the tax position?” and getting that agreed; then, in the case of a UK company—there are about 80-odd UK companies there—they would disclose that to HMRC and that would be settled and agreed. That is what we have here. They are all different, as you have seen.
Austin Mitchell
But you advise them to go to Luxembourg and you negotiate with the Luxembourg tax authorities.
Chair
All the letters are on PricewaterhouseCoopers headed notepaper.
Kevin Nicholson
Just to answer Mr Mitchell’s question, Madam Chair, you are right, we did advise on all of those. You have to remember that you are looking through a relatively narrow lens here of one country over eight years and one set of data, which is ours. If we were advising, say, a US company on where to build their research and development centre, it might be the UK, so you would see lots of UK letters.
Chair
We are looking at what you advised. All that has come to light—I am sure there were more—is 343 companies that you advised and 548 letters that have reached the public domain on your headed notepaper, in which you appear to me to have mass-marketed. I will pursue the mass-marketing for a minute. It seems to me that they all suggest setting up subsidiaries, don’t they?
Kevin Nicholson
I don’t know, Madam Chair, but I assume they do if you are saying that.
Chair
I am sure you have looked at them.
Nick Smith
Have you looked at the materials?
Kevin Nicholson
I have not gone through 617, or whatever it is, pages of rulings, no, but I do understand what they are doing, why they are there, what was happening, what has changed and how, if people do not like the result of that, that is stopped.
Stephen Phillips
We are going to look at the Shire example in a minute, and we have Mr Carruthers here. One of the answers that you gave a moment ago was that Luxembourg was competing, along with a number of other countries, for tax revenues. We all understand that. If one takes the Shire deal as an example, it resulted in a corporate tax rate of 0.0156%. What benefit is there to the Luxembourg authorities in that arrangement?
Fearghas Carruthers
May I interrupt, Kevin, as that is a question directed at Shire? I am delighted to be here today—
Stephen Phillips
Actually, Mr Carruthers, I will let you in in a moment. I want Mr Nicholson’s answer to that question, please.
Kevin Nicholson
If you take a financing arrangement, what is happening, effectively, is that you have a choice, right? You are a UK company—let’s assume it’s a UK company—
Stephen Phillips
Mr Nicholson, I am going to interrupt you. I asked you a very simple question. If it is right that the Shire arrangement resulted in corporation tax of 0.0156% being paid to the Luxembourg authorities, there is not very much in it for them, is there?
Kevin Nicholson
Sorry, that is what I was just going to try to explain, because it is important I do not get this wrong and mislead. If you have a UK company looking to finance, you can do it directly from the UK, you could do it through shareholder equity, or you could do it through a loan. If you are going to do it through a loan, it will not always be Luxembourg, but Luxembourg is one of the places that you would look to go to.
Stephen Phillips
This is an entirely artificial loan, isn’t it, between entities in the Shire group, of about $10 billion?
Kevin Nicholson
These are not artificial; they are real loans. May I just finish on the percentage, because that might help? In the structure—
Nick Smith
The entities are artificial, not the loans. That is the point my colleague is making.
Kevin Nicholson
Even that I would dispute. Sorry, it is hard to—
Stephen Phillips
Mr Nicholson, you finish and then let’s have Mr Carruthers in.
Kevin Nicholson
Okay. In a typical example, the UK might put a loan into a branch in Luxembourg that would then on-loan to a subsidiary that would go out and buy something. The tax rate is the difference between the interest rates that the branch and the subsidiary were charged, and because there isn’t a great deal of risk involved, the arm’s length rate would arrive at that interest rate—the interest rate on which it is taxed—and that ends up the effective rate that you have described. All those payments have to be done under arm’s length OECD principles.
Chair
Can I just come back? I’m sorry to interrupt—
Stephen Phillips
I think, to be fair, we must let—do you want to say something at this stage, Mr Carruthers?
Chair
I was going to bring him in later; let’s bring him in later. I want to stick, if I can, to the mass-marketing, because it strikes me that the features—let me get those features out. One is that they’ve all got subsidiaries in Luxembourg because of the low tax. The second is that it’s all about lending money to each other; it’s all about intra-company loans, isn’t it?
Kevin Nicholson
Actually, it isn’t. I think about 30 to 40% of them—I can’t quite—
Chair
All those companies—I’ve looked at most of them—that were set up in Luxembourg were set up to avoid tax by an intra-company loan agreement.
Kevin Nicholson
I’m sorry to disagree, Madam Chair—
Chair
I thought you hadn’t looked at them all in detail; you hadn’t had time.
Kevin Nicholson
No, I haven’t, but about 30 to 40% of them are private equity holdings, and that would not be the reason to have a private equity holding. They are nothing to do with the avoidance of, say, UK tax or intra-group loans on a private equity holding. The second thing is on the mass-marketing, because you asked about that and in case we don’t come back to that. The mass-marketing—if you look at HMRC’s definition under DOTAS, it’s all around secrecy, not wanting HMRC to know. This is nothing like that; this is going to a revenue authority—
Chair
Oh come on! That’s the most absurd interpretation I have ever heard of mass-marketing. Mass-marketing means you have a scheme that you market to a whole lot of different companies. That’s what you’ve been doing, and that’s what you denied, which is why I accused you of lying, and I don’t do that lightly. That is what you denied to us when you came to see us in January 2013. You have advised companies on the same scheme; you’ve written to the Luxembourg authorities yourself—all on your headed notepaper. I don’t know how you can possibly think that is not mass-marketing.
Kevin Nicholson
Because it isn’t. It is actually working with clients around their individual needs and requirements. They are all different, Madam Chair; none of them are the same.
Chair
Well, let me give you an example.
Stephen Phillips
Mr Nicholson, you said in January 2013, “we are not in the business of selling schemes.” Is that evidence you stand by?
Kevin Nicholson
Yes.
Stephen Phillips
We are looking here at 548 schemes that were put to the Luxembourg tax authorities, involving 330 different companies. Those companies didn’t come up with those schemes themselves. You went to them as their tax advisers and said, “We can save you tax by putting in place this complex structure,” didn’t you? That’s what PwC does. That’s how it generates 25% of its revenue in the UK.
Kevin Nicholson
Well, there’s a series of questions there. No, 25% of our revenues in the UK is not derived from this sort of work at all—
Stephen Phillips
Really? Because in your written evidence in January 2013, PwC said that it was, so that was untrue, was it?
Kevin Nicholson
No, no. Sorry. I will answer the questions. 25% of our revenue in the UK comes under the badge of tax, which I am the leader of. 25% of our revenue in the UK does not come from this sort of advice. It’s pensions, it’s actuarial work, it’s reward, it’s mobility, international tax movements; it could be legal. That’s why I said no to 25%, but getting back to the mass-marketed—
Stephen Phillips
Selling schemes is what I’m interested in. Your evidence was, “we are not in the business of selling schemes”, in circumstances where 548 schemes have been put to the Luxembourg tax authorities for 330 of your tax clients.
Kevin Nicholson
They’re not schemes by any sense of the imagination, Madam Chair. These are individual companies, over an eight-year period, all of whom need financing. What you’re looking at is Luxembourg. There could be other companies that have gone to Holland; they could have come to the UK; they could have gone to the US. You happen to be looking at Luxembourg.
Chair
Let me take an analogy, because it’s absurd if we’re going round the houses. If I go to Marks and Spencer’s, see a dress in the window there, go in and buy a size 12 dress and then go home and have to shorten it and let it out a bit, but it’s still got the same colour, the same style and the same material, it’s the same dress, and that’s what you’ve been doing in Luxembourg. I might shorten; I might do something else with it, but essentially the product is the same. You talk to my constituents, Mr Nicholson, you talk to the constituents of any of us around the table—you are selling a product in Luxembourg that is about going to set up subsidiaries there and then getting a device—we’ll come to Mr Carruthers in a minute—that actually means intra-company loans, to get all the income into Luxembourg, where it’s then taxed at 0.0 whatever it is—1.16%. That’s what you’re doing, isn’t it? Just be honest.
Kevin Nicholson
No. I am being honest, Madam Chair, and it’s quite frustrating. We deal with 15,000 clients in the UK alone, right?
Chair
Let’s just concentrate—
Kevin Nicholson
Well, I am.
Chair
—on the 343 companies and the 548 letters in your name going to Mr Kohl in Luxembourg.
Kevin Nicholson
These are all—well, I think they are mostly—large, sophisticated businesses with complex arrangements. This is not, I’m afraid, like buying a dress in Marks and Spencer.
Chair
It is; it is the same essential business.
Stephen Phillips
Do you at least accept that these are schemes to minimise tax?
Kevin Nicholson
No.
Stephen Phillips
What are they then?
Kevin Nicholson
First, there will be some commercial and acquisition, there will be investment overseas—
Stephen Phillips
What is the purpose of the Shire scheme?
Kevin Nicholson
One of the things that they will look at is what the cost of the tax is, because tax is a commercial cost—if I do it in this way or if I do it in that way—but ultimately there is a commercial rationale. I do not think that Mr Morse is here today, but the NAO Report to the Committee in November 2012 looked at five settlements, three of which were CFC settlements similar to this. One of those, company D—
Chair
If they are similar, they all have the same characteristics, have they?
Kevin Nicholson
The characteristics would be the same if you are going from the UK and Luxembourg because the tax systems are the same. They do not have the same characteristics in terms of the individual thing that they were financing or the history of that organisation.
Chair
They have commonalities, actually, in Stewart Jackson’s terms.
Kevin Nicholson
If you look at the Report from Sir Andrew Park, he looks at—
Chair
We know about that report. You are trying to divert us from the real thing.
Kevin Nicholson
No, I am not. Company D is exactly on all fours with the circumstances that we are talking about. He makes it clear at the end of the Report that, had the taxpayer litigated, it would have been found that it was not motivated by tax avoidance.
Chair
Mr Nicholson, did company D have the characteristics of what we are talking about today?
Kevin Nicholson
Company D was one of the companies with the CFC regime.
Chair
Did company D have the characteristics that we are talking about today?
Kevin Nicholson
It had a ruling in Luxembourg—
Chair
Did it have the characteristics of the companies that we are talking about today?
Kevin Nicholson
It depends on what you mean by characteristics.
Chair
Well, you just quoted it as having the characteristics of the companies that we are talking about today. Did it?
Kevin Nicholson
I believe that it had the broad characteristics of what we are talking about today.
Chair
Thank you. If it had the broad characteristics, we are not talking about individual, personalised, customised, different companies; we are talking about something with broad characteristics that then becomes customised.
Kevin Nicholson
No, Madam Chakr. I am trying to say that the broad characteristics are, first, you are looking at Luxembourg—
Chair
You cannot have it both ways.
Stephen Phillips
Hold on, if you are looking at Luxembourg, you are absolutely right. In each of the cases where there has been a leak of these documents for your 340 clients, there was a letter to the Luxembourg tax authorities, essentially for pre-approval of something that was going to result in lower payment of tax. Is that right?
Kevin Nicholson
You go to the Luxembourg authorities in advance for a ruling and say that if these things happen—
Stephen Phillips
So the answer to my question is yes?
Kevin Nicholson
You go and ask for a ruling to say what the tax impact would be of doing these things, just as you could in the UK, Australia, many other countries, Ireland—actually, probably not Ireland.
Stephen Phillips
So there is another feature of commonality between each of these 548 deals for these 340 clients.
Kevin Nicholson
But those are the Luxembourg rules.
Stephen Phillips
You have put them together. You have gone, in advance, to the Luxembourg tax authorities to say, “This is how we propose the tax treatment should work,” and the Luxembourg authorities have agreed that. That is right in each of these cases, isn’t it?
Kevin Nicholson
That is the process, just as we have a process here.
Stephen Phillips
And those companies did not come up with those things themselves. You did it—PwC, as their tax advisers.
Kevin Nicholson
I can’t say that on all the cases. Remember that these are big organisations with in-house tax departments and lots of advisers.
Chair
They are your letters, for heaven’s sake, on your headed notepaper.
Kevin Nicholson
Yes.
Stephen Phillips
Mr Nicholson, come on. We know how this works. In perhaps a handful of cases, they might have come to you and said, “We have an idea. Wouldn’t it be a good idea if we did this?” but in the vast majority of these cases, you—PwC—have gone to these companies and said, “We can help to reduce your tax bill globally by putting in place these arrangements, provided that they are approved by the Luxembourg tax authorities.” You have been marketing these arrangements to your clients, haven’t you?
Kevin Nicholson
No, I think that is a misrepresentation. Remember, these clients will be ongoing clients of the firm. We will talk to them regularly on an ongoing basis—“Where are you investing? What do you want to acquire? Where do you need additional finance?” Out of those discussions will come the sort of work and discussions around, “Look, if we did it this way, what would be the impact on tax? If we did it that way, what would be the impact on tax?” We are having similar conversations about where they might put their manufacturing, which might be the far east, and where they might put their R&D, which might be the UK. This is not unique; it just so happens that you are looking at one territory over a certain period of time, and all those rulings at a time.
Chair
And it’s just to avoid tax.
Kevin Nicholson
No, no, it isn’t.
John Pugh
What other features did these arrangements have in common? It might be commercial benefit or, as you say, wanting to put your business in one place or another. What other features did all these schemes have, apart from the fact that they were mechanisms for avoiding tax? We are looking for a common thread here. They are all different sorts of schemes, as you said, but the one thing they all seem to have in common is tax avoidance, and there is nothing else that they seem to have in common beside tax avoidance.
Kevin Nicholson
No, they are all looking for financing or the holding of investment. If you take the private equity example, if you have a private equity house or a private equity structure, you can have hundreds of partners or investors from around the world; that has to be based somewhere. The reasons they would choose Luxembourg are, first, because they would get clarity from the ruling and, secondly, because they can effectively ensure there is no withholding tax coming out as the receipts come into the private equity house. Ultimately, that has absolutely no bearing on the taxation of either the partner or the thing they have invested in. The partners are still fully taxed if they are taxable—most of them aren’t—and the company, if we say it is a UK company that they have invested in, is still taxed in the UK.
John Pugh
Help me here. Tax avoidance aside, what other feature, commercial benefit or use is there to any of these schemes? It may not be something that is in every single scheme, but what is a fairly dominant feature in the schemes you have marketed?
Kevin Nicholson
Subject to not correcting the words that I wouldn’t use—
Nick Smith
Say that again. Subject to what?
Kevin Nicholson
Sorry, I wasn’t trying to be clever. I was just saying that if I say, “Yes,” someone will turn around and say, “You have accepted that there are schemes and that you are mass-marketing them.” The common feature here is that they are big, international businesses that are looking at where to locate—
John Pugh
No, the one thing that the big, international businesses are all doing in all these cases is avoiding tax by doing this. I am asking you, what else do they very commonly do? What do more than 50% of them do with these schemes in addition to avoiding tax?
Chair
Why do they go to Luxembourg, apart from tax?
Kevin Nicholson
The tax system, as I said at the beginning, is clear. It has been created by the Luxembourg authorities to make it attractive for financing and the holding of investments. It is absolutely clear. As I said earlier, Madam Chair, if you are looking at R&D—I know you don’t want to—you would look at the UK. That would be the common feature. As a business, I would come to the UK for my R&D innovation because the tax system has been created to make it attractive for businesses to come here for innovation. For manufacturing, it might be the far east. For financing, it would be Luxembourg.
Stephen Phillips
But those businesses actually bring their R&D operations to the United Kingdom, because it is advantageous to them to domicile those operations here. Correct?
Kevin Nicholson
Yes. And the financing—
Stephen Phillips
Right. Taking Shire as an example, how many Shire employees—perhaps Mr Carruthers can help us—were domiciled in Luxembourg in connection with intra-company loans totalling twice the annual revenues of the entire group? How many, Mr Carruthers?
Fearghas Carruthers
Maybe I can answer the question in terms of why we have an operation in Luxembourg.
Stephen Phillips
You can in a moment, Mr Carruthers. The first thing you can do is to give me a number.
Fearghas Carruthers
We have two full-time employees in Luxembourg.
Stephen Phillips
Two full-time employees in Luxembourg, in circumstances where the Luxembourg entities, as I understand it, have managed intra-company loans of about $10 billion. Is that right?
Fearghas Carruthers
That would be correct.
Stephen Phillips
How many employees have you got worldwide?
Fearghas Carruthers
We have about 5,600 employees worldwide.
Stephen Phillips
Right. Now give the explanation that you wanted to give.
Fearghas Carruthers
Coming back to the point about the staffing, the staffing is entirely appropriate to the operation we have in Luxembourg. If it were anywhere else doing these activities, that would be the level of staffing we would use.
Chair
The staffing is appropriate for what?
Fearghas Carruthers
For the financing activities that are undertaken by our Luxembourg company.
Nick Smith
How much profit did you make in Luxembourg with your company?
Fearghas Carruthers
The profit on an average basis in the financing company would be about $400 million, but it also has borrowings in from Ireland which equal that, so in terms of the net spread, they pay 29% corporation tax in Luxembourg.
Nick Smith
Okay, so you made $400 million profit in Luxembourg last year.
Fearghas Carruthers
No, we made a net profit of about—I need to work it out—
Stephen Phillips
Does $1.87 billion in a five-year period ring a bell, Mr Carruthers?
Fearghas Carruthers
Our financing company in Luxembourg has received that number.
Stephen Phillips
And how much tax has it paid?
Fearghas Carruthers
But our branch, which is the parent of the Luxembourg fiscal unity, has also paid a very similar amount.
Stephen Phillips
How much tax has been paid?
Fearghas Carruthers
About $2 million.
Stephen Phillips
Right. What’s the tax rate?
Fearghas Carruthers
29%.
Stephen Phillips
Right. So you paid $2 million on $1.87 billion, and you say that’s 29%, do you?
Fearghas Carruthers
No. On the spread between what Luxembourg borrows at and what it earns income on, it pays tax at 29%, which is $2 million of Luxembourg tax.
Stephen Phillips
But what did this Luxembourg entity actually do, other than lend money to other companies in the group?
Nick Smith
With two staff.
John Pugh
They must be the most productive staff in the country.
Fearghas Carruthers
There is a very important point here. Shire has grown through acquisitions over a number of years, and it has also invested significantly in infrastructure. Shire has funded those acquisitions; it has funded investments in infrastructure, such as our Lexington campus in Massachusetts in the US.
Chair
We are interested in what you are doing in Luxembourg, Mr Carruthers.
Mr Burrowes
The two employees, particularly—you are talking about them and what they have done, are you?
Fearghas Carruthers
The two employees, supported by the other directors of the company.
Chair
You? Do you go there?
Fearghas Carruthers
Yes.
Chair
And you spend how much time there?
Fearghas Carruthers
I am there probably five to 10 times a year. I was supposed to be spending two days this week, actually, including today.
Chair
Can I ask you a question and then I’ll bring it back to Mr Nicholson? If you are putting nearly £10 billion of loans through the two guys in Luxembourg, where are the decisions taken?
Fearghas Carruthers
The decisions are taken in Luxembourg.
Mrs McGuire
Can I ask what your staff bill is in Luxembourg?
Fearghas Carruthers
Our staff bill is €135,000.
Mrs McGuire
€135,000 for the two staff in Luxembourg, making these major decisions that have generated—
Fearghas Carruthers
Yes,
Chair
Over £10 billion of loans.
Fearghas Carruthers
Well, they make decisions plus there are also the members of the board of the company.
Chair
What do you mean, “They make the decisions”? Take me through it. What level are they? What sort of level are the guys there?
Fearghas Carruthers
All two—those two employees are directors of the company.
Stephen Phillips
How old are they?
Fearghas Carruthers
I wouldn’t like to comment.
Stephen Phillips
Are they in their 20s, their 30s or their 60s?
Fearghas Carruthers
I would hazard a guess that they are 50-plus.
Stephen Phillips
And are they directors of any other companies in Luxembourg as well?
Fearghas Carruthers
Yes, they are.
Stephen Phillips
How many other companies are they directors of? Are they directors of some of the many thousands of companies that are all domiciled at 5 rue Guillaume Kroll?
Fearghas Carruthers
One director would be a director only of Shire companies, and the other director would be a director of a number of other companies. I do not know the total. I am happy to write back.
Mrs McGuire
Your total staffing bill, just to repeat it, is about €120,000?
Fearghas Carruthers
€135,000.
Mrs McGuire
For these two incredibly productive people in Luxembourg?
Nick Smith
Who made you nearly $2 billion in profits in five years.
Mrs McGuire
I have to say, I have rarely come across such leverage in the financial services industry for such a modest salary.
Fearghas Carruthers
It is not only about the two employees. We also have two other directors who attend and bring their expertise, and their expertise together—
Chair
The point is that there has to be substance in Luxembourg and the decisions have to be taken in Luxembourg. You are stretching our credulity by suggesting to us that these two employees, who are also directors—we have seen the brass plates on the door—of umpteen other companies, are seriously the guys taking the decisions on loans totalling over £10 billion. Let me just put this to you, Mr Carruthers, because it is a very serious matter: if the decisions, in substance, are not taken in Luxembourg, this is not just avoidance; for me, it is fraud.
Fearghas Carruthers
Well, Madam Chair, I can assure you that the decision making in respect of Luxembourg—that Luxembourg company—is made in Luxembourg. I can assure you.
Stephen Phillips
Apart from lending $10 billion to other companies within the Shire group, am I right in understanding that those Luxembourg entities have not done anything else? They don’t make anything. They don’t manufacture anything. They are not responsible for R and D. They just loan money to other companies within the Shire group. Is that right?
Fearghas Carruthers
That would support the small headcount. It is not a significant resource needed to—
Stephen Phillips
That is fine. I understand. And they charge interest on those loans, don’t they—as much as 8% or 10%? That is how they make their profits.
Fearghas Carruthers
Let me come back to you on the interest.
Stephen Phillips
Just answer the question first.
Fearghas Carruthers
I am going to answer the question. In terms of the interest rates, there are no loans that are on 10%. There is one tranche which is 9%. The average interest yield on the $10 billion is 4%. We arrive at that by a very rigorous process of looking at credit ratings of all the likely borrowing entities. We go through a very rigorous process to assess their ability to borrow and the terms on which they should borrow.
Stephen Phillips
Let’s have the interest rate. If you want it at 4%, it’s 4%—£10 billion of loans, £400 million a year. That’s how you get your £400 million, yes?
Fearghas Carruthers
That is correct.
Stephen Phillips
Right. That £400 million in interest payments by other Shire companies is then written off in the jurisdictions in which they are domiciled for tax purposes against their profits, isn’t it?
Fearghas Carruthers
It will depend on the particular country jurisdiction in which it is borrowed and which has had the need.
Stephen Phillips
It is a pretty simple question and I am afraid that was an evasive answer.
Fearghas Carruthers
I don’t mean to be evasive. I am just saying that not all companies provide a deduction—
Stephen Phillips
The vast majority do, don’t they?
Fearghas Carruthers
A number of countries do, and in those we would get an interest deduction.
Stephen Phillips
For example, the United Kingdom does, and the United States of America does, and those are the countries in which you have the majority of your operations, aren’t they?
Fearghas Carruthers
We do not have the majority of our operations in the UK. We have about 6% of our work force in the UK. In terms of borrowing into the UK, we do not borrow from Luxembourg to the UK.
Stephen Phillips
Let me put my question again, slightly differently. In the vast majority of companies where Shire companies are domiciled for tax purposes, the interest payments they have to make to the related Shire entities in Luxembourg will be deductible against the profits they are making. That is correct, isn’t it?
Fearghas Carruthers
The loans have obviously been drawn down for sound business purposes to fund acquisitions and the interest cost is deductible.
Stephen Phillips
Come on, Mr Carruthers, this is how it works. You therefore manage to reduce your profits in the jurisdictions where Shire is actually operating, while at the same time, because of the deal which Mr Nicholson and PwC have negotiated with the Luxembourg tax authorities, paying an effective corporation tax rate on those loans on the other side of the deal of 0.0156%. A very nice little scheme if you can get it, isn’t it?
Fearghas Carruthers
I don’t accept the terminology of “scheme”,
Stephen Phillips
Do you accept the rest?
Fearghas Carruthers
I don’t accept the rest. If you could repeat the question, I would like to take each part as we go through and respond to it.
Stephen Phillips
Right. One of your operating companies—I don’t know where it is domiciled so let’s pick one that is domiciled somewhere in the United States—takes a loan from these entities in Luxembourg and pays interest on that loan. It sets off that interest against its profits to reduce the amount of corporation tax it has to pay in the United States.
Fearghas Carruthers
That is correct. Obviously, that would be for an acquisition, for example, and that would be as US rules set out absolutely clearly.
Stephen Phillips
Fine. What then happens on the other side of the deal is that you would expect the entities in Luxembourg then to have to pay to the Luxembourg tax authorities tax on the amount that they are receiving in interest because that is profit to them on the loan which they have made to the company in the United States. That is also correct. That is what you would expect to happen, isn’t it.
Fearghas Carruthers
If we go back to the arrangement or the position that we have, we have borrowing from Ireland and we have interest-bearing loans from Luxembourg. The spread between those two is agreed at arm’s length and on which we pay 29% Luxembourg corporation tax.
Stephen Phillips
Right. You didn’t answer the question, but we will draw our own conclusions from that. What is actually happening here is that Mr Nicholson’s firm, or at least the Luxembourg part of it, has managed to negotiate a deal where Shire is managing to reduce the amount of corporation tax it pays in the places where it is actually operating, while at the same time not paying a corresponding amount in Luxembourg because PwC has managed to persuade the Luxembourg tax authorities that there is nothing of significance going on in Luxembourg. It is a scam, isn’t it, Mr Carruthers?
Fearghas Carruthers
No, it is not. To be absolutely clear, we have borrowing in Luxembourg and we have lending out in Luxembourg.
Mr Burrowes
How do your huge internal loans compare with your borrowing needs? How do you quote those?
Fearghas Carruthers
At the current moment we have external borrowing of approximately $800 million.
Stephen Phillips
Less than 10% of your intracompany loans is external borrowing.
Mr Burrowes
The loans are how much?
Fearghas Carruthers
We currently have £10 billion outstanding, but clearly we have—
Chair
That is £10 billion of intracompany loans. £10 billion.
Mr Burrowes
How can you justify that compared with the borrowing needs?
Fearghas Carruthers
The entities that have made acquisitions have needed borrowing to fund their activities, be that investment in R and D—
Mr Burrowes
At that level.
Fearghas Carruthers
Yes, at that level. Shire has a very long history of growing by acquisition. Very recently, we paid $4.2 billion for a company called ViroPharma in the US. Our US operations have needed significant funding for expansion. We have undertaken that financing and as the tax rules work we have done that entirely through a process of working out what would happen at arm’s length, and that is exactly what the tax rules say you have to do. You have to go out and look into them on an arm’s-length basis, and that is exactly what we have done.
Chair
Go on.
Fearghas Carruthers
We have done that using the Moody’s shadow rating procedure. We have rated the US organisation to work out what its debt capacity is and on what terms it could borrow in the market to finance this expansion. We have absolutely complied with that.
Austin Mitchell
On the £10 billion in loan interest that you owed to the company in Luxembourg by the end of 2013—in a group that has few overall borrowing needs, to be quite honest—that is more than two years’ sales for the entire group, isn’t it? Would that entity in Luxembourg exist if it were not for the tax concession that it gets, which reduces the tax for all the other companies? Is it just for tax purposes?
Fearghas Carruthers
Absolutely not. There is no concession with Luxembourg tax.
Chair
Why is it there, then, if not for tax purposes? These two middle-aged guys—
Austin Mitchell
Do you want the money to tour Luxembourg and be flashed around a bit?
Fearghas Carruthers
No. Maybe this would be an opportunity to talk a little about Shire. Shire is very focused on bringing medicines to the marketplace that deal with life-altering conditions. A lot of that involves people with rare diseases that affect 0.05% of the population. In some cases, 30% of people who have the conditions die before the age of five.
Q99Chair
It is because what you do is so important that we are so offended by the way in which you do it. It is because these medicines are so important that we feel such huge offence at the way in which you have scammed the British public.
Fearghas Carruthers
We have not scammed the—
Q100Chair
You are trying to tell us that what you do is important. We know that—those medicines are very important to lots of people—but the way in which you conduct your business is outrageous.
Fearghas Carruthers
I would like to answer this question, if I may—
Nick Smith
Mr Nicholson, on the arrangement which Shire have in Luxembourg, which Mr Phillips just outlined, was your company the conduit for setting up all of these arrangements?
Kevin Nicholson
I don’t know, to be honest. I am sure Mr Carruthers could answer that.
Chair
Well, we do, because we’ve got the leaks.
Nick Smith
So you don’t know?
Kevin Nicholson
Well, I don’t know. You said “all of them”.
Nick Smith
Okay. The arrangements that we specifically heard about this afternoon—did your company act as a conduit?
Kevin Nicholson
If our name was on the letterhead, then clearly—
Stephen Phillips
Oh, come on, Mr Nicholson. You know your letters are—
Chair
Okay, let’s establish this. Maybe our Clerk can help us. We have a before and after chart on Shire. Has everybody got a copy of it? Let’s start with that. Let’s do the before and after. There are copies for members of the public as well, if they want to see them. “PwC” is on the top, just in case you have forgotten.[1]
Stephen Phillips
While those are being distributed, Mr Nicholson, let’s not waste the time. Have you read the letters that have been leaked to the Luxembourg tax authorities from your partner in Luxembourg on PwC notepaper?
Kevin Nicholson
I haven’t read all of them, no. I have read some of them. Sorry; just to be clear, the reason why I haven’t done that is that, first of all, these were not only agreed in Luxembourg but agreed and settled with HMRC. They were happy that tax avoidance was not the—
Stephen Phillips
The question that was being put to you by Mr Smith was whether you were responsible for putting in place these arrangements, and that is absolutely clear from these letters, isn’t it?
Kevin Nicholson
We would have been involved, but it depends how you use the word “responsible”.
Stephen Phillips
The letters begin—for example, take this one of 14 July 2010. It is a letter to Mr Kohl, who seems to be the Luxembourg tax official responsible for most, if not all, of these deals, saying “We discussed in our meeting on 10 March 2010”. It then goes on to set out the arrangements with Shire. They are all designed by PwC, aren’t they?
Kevin Nicholson
It would be normal in Luxembourg, from what I understand, for the agents—
Stephen Phillips
It is a very simple question. They are all designed by PwC, aren’t they? Yes or no?
Kevin Nicholson
Sorry, I am not trying to be awkward. I just don’t understand what the word “designed” means. What I am trying to say is that we will have helped a client. It is normal for the advisers—
Chair
What do you understand by it?
Nick Smith
What do you mean by “involved”, then? Let’s hear your side of the story in terms of these arrangements with Shire.
Kevin Nicholson
I don’t know the Shire ones, but like any client—
Chair
You do know the Shire. They are PwC.
Kevin Nicholson
Madam Chair, I am trying to help the Committee by explaining our relationships with the clients. As I said earlier, we would have long-standing relationships with the clients, and we would meet them regularly to talk about what they were doing. In those discussions, some of the things that would come out would be financing, employment needs, and pension requirements. All of those things would be discussed. We would discuss options. Tax is a commercial cost to the business, so yes, one of the things that we would do was to work with clients to say, “If you did it this way, it would reduce the tax cost.” Absolutely.
Nick Smith
Have you looked at your company’s arrangements with Shire?
Kevin Nicholson
No.
Nick Smith
Not at all?
Kevin Nicholson
Well, I looked at some of the documents. I keep coming back to this. Not only was this several years ago, but they had been settled with HMRC. All of these had been settled.
Chair
We do not know what HMRC does. It is one of our frustrations. Let me take you to these two, because these have both got PwC. What interested me in these two was—you have it in front of you; I hope they have given you a copy—appendix 2. If you look at this one, which is a before, you find royalties going into Shire UK, which fits in with research and development taking place in the UK. The actual economic activity for R and D comes here, with undoubtedly very generous tax credits, and you account it for it there. You then go after—have you got the other one?—and it disappears. Suddenly, miraculously, the royalties that were attributed to activity in the UK disappear. Why?
Kevin Nicholson
Madam Chair, I do not know. I am not involved—
Chair
You tell me. One of you must know. You all knew we were going to talk about Shire this afternoon, because that is why we asked Mr Carruthers here.
Fearghas Carruthers
Madam Chair, that was a royalty stream that came from very old anti-retrovirals related to the HIV condition, which were developed in Canada. For a period of time, the royalty stream was in the UK. At a later period in time, we transferred that to Luxembourg.
Chair
Why?
Fearghas Carruthers
Because we were centralising our royalty streams in all of those—
Chair
Because you were avoiding tax, Mr Carruthers.
Fearghas Carruthers
No, we did not avoid tax in that transaction. That transaction was a taxable transaction in the UK, and we agreed the taxation position.
Chair
What is the difference? Why did you move from that to that? You tell us, Mr Nicholson. It is a scheme, of course. What made you shift from one to the other? You can have a look at them in detail. I hope you have copies in front of you. What is the difference between those two? We want to know why. Explain it to us.
Kevin Nicholson
Is that question for me?
Chair
Yes. Well, one of you.
Kevin Nicholson
I do not know. I was not involved.
Fearghas Carruthers
If you want me to answer that, I would be delighted to do that. In essence, we were locating intellectual property streams from various locations across the globe to manage them centrally. That happened to be in Luxembourg. We went through—
Chair
These two guys in Luxembourg not only manage the loans; they manage the intellectual property, do they?
Fearghas Carruthers
These streams have now gone from the Shire business, because the medicines have been replaced by new evolutions in the anti-retroviral area. This transaction, actually the value of this transaction, had to be pre-ruled and agreed with HMRC. We went through the full process and—
Chair
I am not interested in that bit. What you said to us before was that you decided to put all your intellectual property into Luxembourg. Is that right?
Fearghas Carruthers
What I said was that we put intellectual property streams related to anti-retrovirals into Luxembourg.
Chair
You put them into Luxembourg. So these two guys who were responsible for £10 billion-worth of intra-company loans were also responsible for overseeing the intellectual property rights around some of your research. Is that right?
Fearghas Carruthers
It is not research. It is a stream of royalties from the companies that commercialise these products.
Chair
And there was no tax advantage in that.
Stephen Phillips
There was a significant tax advantage.
Fearghas Carruthers
There was no tax advantage.
Nick Smith
You said you were centralising all your royalty streams. Were they all centralised through Luxembourg?
Fearghas Carruthers
No. We were centralising the royalty streams in relation to this small part of our operations.
Chair
They all go here—royalties from 1 January 2010—into Luxembourg. That is what this little diagram shows.
Fearghas Carruthers
Yes, that is correct, but, as I said, it is not all royalties. It is a very small part of our business.
Chair
Why does it show it there as all royalties?
Fearghas Carruthers
I think it says all royalties in respect of GSK.
Chair
No. It just says royalties from 1 January 2010.
Fearghas Carruthers
If I could clarify. I can’t see the chart you are holding because there is a speaker in the way. In the copy I have it says GSK. It is only that royalty stream from GSK in the US. It is not our global royalties.
Nick Smith
How many other royalty schemes were centralised as part of this process?
Fearghas Carruthers
There are not any schemes.
Nick Smith
Excuse me.
Fearghas Carruthers
Basically, we have income streams.
Nick Smith
Streams rather.
Fearghas Carruthers
I think there were three income streams.
Chair
Why did the structure change? Can you explain all this to us? Come on, just simply, why? I have got another absolutely incomprehensible structure to show you afterwards. I would like to understand what this is all about.
Fearghas Carruthers
For business reasons, we centralise those three royalty schemes.
Chair
Business reasons or tax reasons?
Fearghas Carruthers
For business reasons.
Chair
Does business mean tax?
Fearghas Carruthers
No, business means business.
Stephen Phillips
What are the business reasons that cause you to do that?
Fearghas Carruthers
Luxembourg is a good place to hold intellectual property. It has a good corporate law environment.
Stephen Phillips
It is a good place to hold it because you pay less tax there.
Fearghas Carruthers
It is really important in the pharmaceutical industry that we can demonstrate and pursue title over patents. Luxembourg has well established legal principles and therefore is a location where we can hold intellectual property.
Stephen Phillips
Are you being straight with the Committee? The difficulty I have is that your company has a bit of a track record here, hasn’t it? In 2008, when the previous Government changed the rules on tax, you re-domiciled the company to Jersey and re-domiciled for tax purposes to Ireland. That was to avoid what the British Government was then doing in relation to intra-company loans and avoidance. That’s right, isn’t it?
Fearghas Carruthers
No. What I would say is that at the time—and this is clear in our circular—there was a concern that legislation would be introduced that would tax profits that had nothing to the do with the UK in the UK. That was a significant risk to our business. We then decided because of the instability and uncertainty we could not stay in the UK, and we moved to Ireland at that point.
Stephen Phillips
You did not move anything significant, did you? You had still got several thousand employees out in Berkshire, is it?
Fearghas Carruthers
We have 300 employees remaining in the UK. We have 6,000 employees globally and the majority of those are in the US.
Stephen Phillips
How many are now in Jersey? You are supposed to be a Jersey company?
Fearghas Carruthers
We are an Irish tax resident company.
Stephen Phillips
I am asking you about your headquarters. I will come back to tax domicile. For some reason your tax domicile is different from the place where the company is actually incorporated.
Fearghas Carruthers
In Jersey, we are simply Jersey incorporated. It does not take personnel to establish what we are doing in Jersey.
Nick Smith
Do you have any staff in Jersey?